Fannie Mae 2009 Annual Report Download - page 280

operations. We also apply estimated proceeds from primary mortgage insurance that is contractually attached
to a loan and other credit enhancements entered into contemporaneous with and in contemplation of a
guaranty or loan purchase transaction as a recovery of our recorded investment in a charged-off loan, up to the
amount of loss recognized as a charge-off. We record proceeds from credit enhancements in excess of our
recorded investment in charged-off loans in “Foreclosed property expense” in our consolidated statements of
operations when received.
Individually Impaired Loans
We consider a loan to be impaired when, based on current information, it is probable that we will not receive
all amounts due, including interest, in accordance with the contractual terms of the loan agreement. When
making our assessment as to whether a loan is impaired, we also take into account more than insignificant
delays in payment. Determination of whether a delay in payment or shortfall of amount is insignificant
requires management’s judgment as to the facts and circumstances surrounding the loan.
Individually impaired loans currently include those restructured in a TDR, acquired credit-impaired loans and
certain multifamily loans. Our measurement of impairment on an individually impaired loan follows the
method that is most consistent with our expectations of recovery of our recorded investment in the loan. When
a loan has been restructured, we measure impairment using a cash flow analysis discounted at the loan’s
original effective interest rate, as our expectation is that the loan will continue to perform under the
restructured terms. If we determine that the only source to recover our recorded investment in an individually
impaired loan is through probable foreclosure of the underlying collateral, we measure impairment based on
the fair value of the collateral, reduced by estimated disposal cost on a discounted basis and adjusted for
estimated proceeds from mortgage, flood, or hazard insurance or similar sources. Impairment recognized on
individually impaired loans is part of our allowance for loan losses.
We use internal models to project cash flows used to assess impairment of individually impaired loans,
including acquired credit-impaired loans. We generally update the market and loan characteristic inputs we use
in these models monthly, using month-end data. Market inputs include information such as interest rates,
volatility and spreads, while loan characteristic inputs include information such as mark-to-market
loan-to-value ratios and delinquency status. The loan characteristic inputs are key factors that affect the
predicted rate of default for loans evaluated for impairment through our internal cash flow models. We
evaluate the reasonableness of our models by comparing the results with actual performance and our
assessment of current market conditions. In addition, we review our models at least annually for
reasonableness and predictive ability in accordance with our corporate model review policy. Accordingly, we
believe the projected cash flows generated by our models that we use to assess impairment appropriately
reflect the expected future performance of the loans.
Multifamily Loans
We identify multifamily loans for evaluation for impairment through a credit risk classification process and
individually assign them a risk rating. Based on this evaluation, we determine whether or not a loan is
individually impaired. If we deem a multifamily loan to be individually impaired, we measure impairment on
that loan based on the fair value of the underlying collateral less estimated costs to sell the property on a
discounted basis, as we consider such loans to be collateral-dependent. If we determine that an individual loan
that was specifically evaluated for impairment is not individually impaired, we include the loan as part of a
pool of loans with similar characteristics that are evaluated collectively for incurred losses.
We stratify multifamily loans into different risk rating categories based on the credit risk inherent in each
individual loan. We categorize credit risk based on relevant observable data about a borrower’s ability to pay,
including reviews of current borrower financial information, operating statements on the underlying collateral,
F-22
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)